Earnings in 1H2018 Surprised, Upgrade to "Buy"

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1 - Singyes Solar (75 HK) Clean Energy Sector Solar Equity Research 股票研究 Company Report: Singyes Solar (75 HK) 公司报告 : 兴业太阳能 (75 HK) Earnings in 1H218 Surprised, Upgrade to "Buy" 218 上半年盈利超预期, 上调至 买入 Jun Zhu 朱俊杰 (852) junjie.zhu@gtjas.com.hk 公 司 报 告 证 券 研 究 报 告 清洁能源行业 太阳能 Equity Research Report Company Report Earnings in 1H218 went up 185.7% YoY, better than expectations. In 1H218, sales and net profit of Singyes went up YoY by 3.9% and 185.7%, respectively. Gross margin was up YoY by 3.6 ppts to 24.4%. The core operations remained healthy during the period. Key reasons behind the strong earnings growth are the fall in financing expense coupled with the rise in gross profit during the period. China installed 24.3 GW of new solar capacity in 6M218. According to stats from the NEA, newly installed solar capacity in China in 6M218 stayed flat and reached 24.3 GW. Due to the 531 new policy, we expect nationwide newly installed solar capacity to fall back to between 35 GW to 4 GW in 218, implying that solar EPC demand in 2H218 will fall. However, with the coming of PV grid parity in China, we expect domestic demand to record strong growth again in 219 and 22. We raise our earnings estimates based on more optimistic assumptions. We expect Singyes to complete 51 MW/ 55 MW/ 575 MW of solar EPC projects in FY18/ FY19/ FY2, respectively. Per watt sales of solar EPC are estimated to be RMB 5.5/ RMB 5./ RMB 4.7 from 218 to 22, respectively. Our revised EPS forecasts from FY18 to FY2 are RMB.511/ RMB.584/ RMB.615, respectively. We upgrade the investment rating to "Buy" and raise the target price to HK$ 3.. The new TP corresponds to 5.x/ 4.4x/ 4.2x FY18-FY2 PER or.4x FY18 PBR. 218 上半年的盈利同比增 185.7%, 好于预期 218 上半年公司的收入和盈利分别同比 升 3.9% 及 185.7% 期内毛利率同比回升 3.6 个百分点至 24.4% 公司的核心业务于期内 保持健康 导致盈利猛增的主要原因包括期内融资成本的下降以及毛利润的上升 国内于 218 前 6 个月新增了 24.3 吉瓦的光伏装机 根据国家能源局的数据, 国内于 218 前 6 个月的新增太阳能发电装机容量达 24.3 吉瓦, 同比持平 受 531 新政影响, 我们预 计国内于 218 年的新增光伏装机将回落至 35 吉瓦至 4 吉瓦之间, 意味着 218 下半年 国内对太阳能 EPC 的需求将出现下滑 然而, 在光伏平价上网来临之后, 我们预计本土需 求将于 219 年和 22 年重新录得高增长 我们在更为乐观的新假设下调升了我们的盈利预测 我们预计兴业将于 218 至 22 财年 分别完工 51 兆瓦 55 兆瓦及 575 兆瓦的太阳能 EPC 项目 期内的每瓦太阳能 EPC 项 目收入预计将分别为人民币 5.5 / 人民币 5. / 人民币 4.7 我们经调整后的 218 至 22 财年的每股盈利分别为人民币.511 人民币.584 及人民币.615 我们上调评级至 买入 并调升目标价至 3. 港元 我们的新目标价相当于 5. 倍 / 4.4 倍 / 4.2 倍 218 至 22 财年市盈率或.4 倍 218 年市净率 Rating: Buy Upgraded 评级 : 买入 ( 上调 ) 6-18m TP 目标价 : HK$3. Revised from 原目标价 : HK$2.85 Share price 股价 : Stock performance 股价表现 (1.) [Table_PriceChange] Change in Share Price 股价变动 % of return 1 M 1 个月 3 M 3 个月 HK$2.43 (2.) Aug-17 Nov-17 Feb-18 May-18 Aug-18 HSI 1 Y 1 年 Abs. % 绝对变动 % (2.8) (17.3) (7.3) Rel. % to HS Index 相对恒指变动 % (.8) (11.) (7.5) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. Singyes Solar 中兴外业太运阳输能 [Table_ Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 216A 5, A 5, (73.9) F 5, F 6, F 6, [Table_BaseData] Shares in issue (m) 总股数 (m) Major shareholder 大股东 Chairman Liu, Hongwei 38.6% Market cap. (HK$ m) 市值 (HK$ m) 2,26.8 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( ) 1,6.6 FY18 Net gearing (%) FY18 净负债 / 股东资金 (%) Weeks high/low (HK$) 52 周高 / 低 3.66 / 2.24 FY18 EV / EBITDA FY18 企业值 / EBITDA (x) 6. See the last page for disclaimer Page 1 of 7

2 Earnings in 1H218 went up 185.7% YoY, beating expectations. The operating results of Singyes Solar ("Singyes" or the "Company") in 1H218 were better than market expectations but basically in line with our expectations. During the reporting period, conventional EPC sales stayed relatively flat to reach RMB 787 mn while solar EPC revenues jumped YoY by 16.8% to RMB 1,81 mn. The rise in construction contracts sales (i.e. conventional EPC & solar EPC), which went up YoY by 11.4%, led to the addition of approximately RMB 264 mn in absolute sales increase and was the key reason behind sales growth in the first 6 months of 218. Solar electricity sales in 1H218 reached RMB 146 mn, up 19.7% YoY. The Company completed approximately 32 MW (up 39.1% YoY or an increment of 9 MW) of solar EPC projects in the first half of 218, with average gross margin of 3.3%. Per watt construction sales of solar projects averaged at RMB 5.6. The improvement in solar EPC margin was mainly due to the drop in solar materials costs, especially for solar modules in 1H218. The gross margin of Singyes increased YoY by 3.6 ppts in 1H218 to 24.4%, mainly due to the YoY rise of 2.7 ppts in the construction contracts segment (solar EPC gross margin went up YoY by 5 ppts to 3.3%) and YoY rise of 5 ppts in the construction materials segment during the period. Key reasons behind the sharp increase in earnings in 1H218 are: 1) a sharp recovery in the gross margin; 2) a decrease in selling and non-operating expenses; and 3) the fall in financing expense. As at the end of June 218, the Company maintains grid connected solar farm capacity of MW, with another 67.4 MW pending for grid connection and 72.7 MW of solar projects currently under construction, totaling 468 MW of self-owned solar projects. The Company will selectively sell some of these solar projects to independent third parties when the opportunity arises. Looking ahead, the Company will continue to build its self-owned solar asset portfolio, while at the same time provide conventional EPC & solar EPC service to domestic and overseas clients. Following the 531 new policy, we believe that domestic demand for solar EPC will fall in the 2nd half of 218. However, domestic demand for solar EPC service may pick up again in 219 and onwards after the PV grid parity is achieved. Looking ahead, we believe that the Company will accelerate the disposal of its grid connected solar assets to deleverage itself and to focus more on its core business (i.e. construction contracts). We believe the expected falling PV materials price over the next 12 months will continue to benefit Singyes Solar. Table-1: 1H218 Operating Results and YoY Comparison (RMB mn) 1H218 1H217 YoY Comments Revenues 3, , % Due to the rise in Solar EPC sales COGS (2, ) (2,3.64) -.7% Gross profit % Due to the sharp improvement in gross margin SG&A expenses ( ) ( ) +3.7% EBIT % Other income and gains % Other expenses (39.28) (45.561) -13.9% Finance expense ( ) ( ) -18.6% Profit before tax % Income tax (9.247) (64.846) +39.2% Minority interest (2.762) (1.3) % Net profit % EPS (Basic) % Margins & YoY YoY ppt Gross margin 24.4% 2.8% +3.6 ppts Solar EPC gross margin increased by 5 ppts YoY EBIT margin 15.% 11.4% +3.6 ppts PBT margin 1.6% 5.% +5.6 ppts Net margin 7.6% 2.8% +4.8 ppts Newly installed solar capacity in China in 1H218 reached 24.3 GW, but is expected to decline in 2H218 due to the 531 new policy. According to the NEA of China, domestic newly installed solar capacity in the first 6 months of 218 reached 24.3 GW, which was approximately 46.6% of nationwide newly installed power capacity in 1H218 and was relatively flat when compared to the 24.4 GW installed during the same period of 217. Of the total new installations in 1H218, newly installed distributed solar projects reached GW, up YoY by approximately 72%, while newly installed concentrated solar farms across China recorded only 12.6 GW, down YoY by approximately 3%. Cumulative installed solar capacity in China stood at GW as at the end of June 218, with GW of concentrated solar stations and 41.9 GW of distributed solar projects. Distributed solar project investments remained as the key theme of domestic solar energy investment in the first 6 months of 218. Out of the 24.3 GW of See the last page for disclaimer Page 2 of 7

3 GW new solar installations in 1H218, the eastern China region contributed 6.22 GW (25.6% of new installations), the central China region contributed 3.88 GW (15.9%), and the northwestern China region added 4.12 GW (17.%). Distributed solar project investment outpaced concentrated solar project investment and recorded strong growth during the period. Following the promulgation of the 531 new policy, we believe that new solar installations in China in 218 will fall back to between 35 GW and 4 GW, down by between 25%.and 34% YoY from the 53 GW installed in 217. The implication is that demand in 2H218 will shrink sharply compared to the first half of 218, but we remain optimistic about the outlook of the solar industry in China. Annual newly installed solar capacity in China may gradually recover to the 5 GW level following PV grid parity achievement. We expect the solar industry in China to bottom out from the trough in the middle of 219 with the coming of PV grid parity in China, and annual newly installed solar capacity in China may gradually return to the 5 GW level after the solar industry reaches bottom. We believe the PV grid parity is the key to start a strong wave of solar installations growth unseen in history. We think the existing industry downtrend will impact upstream solar materials makers over the next 6-12 months while downstream EPC service providers and solar farm operators are expected to be less affected. The asset-light business model of solar EPC service providers is a natural defense to the industry downtrend, while solar farm operators are defensive and unaffected by any downtrend just as long as the sun continues to shine. Figure-1: Historical Cumulative Solar Capacity in China Figure-2: Structure of Solar Capacity in China in 6M Concentrated PV Distributed PV M218 22E Unit: in GW. Source: NEA, Guotai Junan International. Source: NEA, Guotai Junan International. We revise up our earnings estimates based on more optimistic assumptions. We expect conventional EPC sales to remain stable and grow at 2.7%/ 8.4%/ 9.6%, respectively, from 218 to 22 amid supportive government policy on the real estate industry in China. Meanwhile, considering Singyes surprised the market by completing 32 MW of solar EPC projects in 1H218 with more than 3 MW of EPC orders in its pipeline for 2H218, we expect the Company to finish more than 5 MW of solar projects in 218. We expect at least 15 GW of new distributed solar capacity to be added in China every year from 218 to 22 amid falling solar materials price. Thus, we estimate Singyes to complete 51 MW/ 55 MW/ 575 MW of solar EPC projects from FY18 to FY2, respectively. Solar EPC per watt sales are estimated to be RMB 5.5/ RMB 5./ RMB 4.7, respectively, from 218 to 22. Further, we expect disposal gains (solar project disposals) to be recorded in 218 and 219 to help boost earnings and deleverage the Company. Net gearing is estimated to fall from 12.5% in 217 to 91.%/ 76.1%/ 64.3% from 218 to 22, respectively. We have adjusted our earnings estimates based on the above new assumptions. Our revised EPS forecasts from FY18 to FY2 are RMB.511, RMB.584 and RMB.615, respectively. We upgrade the investment rating to "Buy" and raise the TP to HK$ 3.. We expect construction contract business (i.e. solar EPC + conventional EPC) of Singyes to remain stable from 218 to 22 given the continued spending on the property sector in China and the expected rise in distributed solar power investment across China for the period. The expected disposal of solar assets (Singyes has more than 4 MW of solar assets ready for disposal) and deleveraging will be key to earnings boost in 218 and onwards, but the uncertainty for such disposals is quite high. We are unsure about the time and scale of the disposals and can t possibly predict the earnings contribution of these disposals. However, we believe that the asset disposals are strong catalyst to the share price of Singyes Solar. Considering the core business operations of Singyes remains very healthy with strong order backlog (more than 3 MW orders for 2H218 and 25 MW of PV front runner projects), we upgrade investment rating of Singyes to "Buy" and raise our TP to HK$ 3.. Our new TP corresponds to 5.x/ 4.4x/ 4.2x FY18-FY2 PER or.4x FY18 PBR. See the last page for disclaimer Page 3 of 7

4 RMB mn RMB mn Figure-3: Historical & Forecast Sales Figure-4: Composition of Revenue Revenues YoY growth Conventional EPC Solar EPC Construction materials Others 6,4 6,2 6, 5,8 5,6 5,4 5,2 25.3% 5,24 5, % 5,795 6,9 6,232 3% 25% 2% 15% 1% 8, 7, 6, 5, 4, 3, 5, ,39 2,226 5,675 5, ,274 1,19 2,588 2,83 6,9 6, ,21 1,292 2,764 2,7 5, 4,8 4,6 3.7% 3.7% 216A 217A 2.1% 218F 219F 22F 5% % 2, 1, 1,624 1,676 1,72 1,864 2,44 216A 217A 218F 219F 22F Figure-5: Forward PER of Singyes Figure-6: Forward PBR of Singyes 1 Max: 7.5x Average: 5.2x Min: 3.5x PER Average 1 Max: 7.5x Average: 5.2x Min: 3.5x PER Average Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International. See the last page for disclaimer Page 4 of 7

5 Table-2: Peers Comparison Company Stock Code Currency Last price PE (fiscal year) PB (fiscal year) ROE (%) D/Y (%) Market Cap (in local $) 17A 18F 19F 2F 17A 18F 19F 2F 18F 18F HKD mn Polysilicon & Wafer Comtec Solar Systems Group 712 HK HKD.7 n.a. n.a. n.a. n.a..5 n.a. n.a. n.a. n.a. n.a. 147 Daqo New Energy Corp-Adr DQ US USD n.a. 3,759 Gcl-Poly Energy Holdings Ltd 38 HK HKD ,547 Oci Co Ltd 16 KS KRW 115, ,496 Rec Silicon Asa REC NO NOK.713 n.a. n.a. n.a. n.a (25.1). 1,71 Wacker Chemie Ag WCH GR EUR ,747 Xian Longi Silicon Materia-A 6112 CH CNY ,789 Simple Average Weighted Average Cell & Module Canadian Solar Inc CSIQ US USD ,85 Hanwha Q Cells Co. HQCL US USD 8.37 n.a n.a. 1.5 n.a. n.a. n.a. 9.2 n.a. 5,468 Jinkosolar Holding Co-Adr JKS US USD ,172 Renesola Ltd-Adr SOL US USD n.a. 9.8 n.a. n.a. n.a. 2.4 n.a. 693 Simple Average Weighted Average Solar System Integrators (EPC) Abengoa Sa -Cl A ABG SM EUR.25.1 n.a. n.a. n.a. (.1) n.a. n.a. n.a. n.a. n.a. 1,948 Singyes Solar 75 HK HKD ,27 Concord New Energy Group 182 HK HKD ,944 First Solar Inc FSLR US USD 53.7 n.a n.a. 43,654 Guodian Technology & Envir-H 1296 HK HKD n.a. n.a. n.a..4 n.a. n.a. n.a. n.a. n.a. 2,244 Jiangsu Linyang Electronic-A CH CNY ,411 Jinkosolar Holding Co-Adr JKS US USD ,172 Sunpower Corp SPWR US USD 6.97 n.a. n.a. n.a. n.a. 6.8 n.a. n.a. n.a. (15.8). 7,713 Tbea Co Ltd-A 689 CH CNY ,61 Simple Average Weighted Average Solar System Operators Gcl New Energy Holdings Ltd 451 HK HKD ,531 Jiangsu Akcome Science & T-A 261 CH CNY n.a. 1.7 n.a. n.a. n.a. n.a. n.a. 1,833 Shunfeng International Clean 1165 HK HKD.239 n.a. n.a. n.a. n.a..2 n.a. n.a. n.a. n.a. n.a. 1,31 United Photovoltaics Group L 686 HK HKD n.a. n.a. n.a..4 n.a. n.a. n.a. n.a. n.a. 3,621 Xinyi Solar Holdings 968 HK HKD ,935 Simple Average Weighted Average Source: Bloomberg, Guotai Junan International. *Prices are as at 3 th August 218. See the last page for disclaimer Page 5 of 7

6 Financial Statements and Ratios Income Statement Balance Sheet Year end 31 Dec (RMB m) 216A 217A 218F 219F 22F Total Revenue 5,24 5,675 5,795 6,9 6,232 COGS (4,15) (4,537) (4,436) (4,537) (4,71) Gross profit 1,135 1,139 1,359 1,472 1,531 SG&A expense (485) (518) (55) (559) (561) Other income & gains Other expenses (16) (76) (64) (72) (81) Operating Profit ,11 1,225 1,292 Net finance costs (368) (621) (499) (498) (474) Profit Before Tax Income Tax (114) (12) (168) (219) (278) profit After Tax Non-controlling Interest (11) (7) (16) (21) (27) Shareholders' Profit / Loss Basic EPS Cash Flow Statement Year end 31 Dec (RMB m) 216A 217A 218F 219F 22F Operating activities Net income D&A Change in working capital (518) (615) (473) (227) (368) Year end 31 Dec (RMB m) 216A 217A 218F 219F 22F PPE 4,364 4,284 4,192 4,7 3,913 Prepaid Expense Others Total Non-current Assets 4,788 4,699 4,627 4,544 4,487 Cash & Cash Equivalents 68 1,22 1,555 1,62 1,658 Inventories 893 1,88 1,863 2,42 2,162 Trade receivable 3,373 3,752 3,535 3,66 3,864 Others 1,26 1,633 1,484 1,559 1,658 Total Current Assets 6,26 7,676 8,437 8,88 9,343 Total Assets 1,995 12,375 13,65 13,352 13,83 Short-term debts 1,293 1,279 1,37 1,382 1,151 Convertibles Trade payable 1,369 1,317 1,357 1,387 1,437 Senior note 554 1,239 2,789 2,889 2,989 Others Total Current Liabilities 3,726 4,436 6,7 6,25 6,198 Long-term debts 1,77 1,439 1,839 1,339 1,239 Senior note 217 1,677 Convertibles Others Total Non-current Liabilities 3,64 3,448 2,148 1,72 1,79 Total Liabilities 6,79 7,885 8,155 7,97 7,97 Total Shareholders' Equity 4,142 4,42 4,84 5,255 5,769 Minority Interest Total Equity 4,24 4,49 4,99 5,382 5,922 Total liabilities & equity 1,995 12,375 13,65 13,352 13,83 Others Cash from Operating Activities 176 (259) Investing activities Capital expenditure (95) (36) (29) (3) (312) [Table_FinancialRatio] Financial Ratios 216A 217A 218F 219F 22F Proceeds from disposal Others (13) (1) 8 (2) (25) Cash from Investing Activities (933) (185) (114) (136) (175) Financing activities Debt raised / (repaid) 275 1, (325) (231) Dividend paid (21) (58) (42) (21) (24) Stock issues 31 Others (398) (138) (157) (168) (178) Cash from Financing Activities (514) (433) Net Changes in Cash (59) Adjustments 5 Cash at Beg of Year 1, ,22 1,555 1,62 Cash at End of Year 68 1,22 1,555 1,62 1,658 Gross margin 21.7% 2.1% 23.4% 24.5% 24.6% EBIT margin 12.4% 1.9% 13.9% 15.2% 15.6% EBITDA margin 15.3% 14.1% 17.6% 19.5% 2.5% Net margin 9.6% 2.5% 7.4% 8.1% 8.2% ROE 13.3% 3.4% 9.3% 9.7% 9.3% ROA 4.9% 1.2% 3.3% 3.7% 3.8% Net gearing 93.5% 12.5% 91.% 76.1% 64.3% Inventory turnover(day) AR turnover (day) AP turnover (day) EV/EBITDA (x) ,378.5 Quick ratio (x) Current ratio (x) [Table_CompanyRatingDefinition] See the last page for disclaimer Page 6 of 7

7 Company Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating Hong Kong Hang Seng Index Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. [Table_IndustryRatingDefinition] Sector Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating Hong Kong Hang Seng Index Definition Outperform 跑赢大市 Relative Performance>5%; or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for KAISA GROUP (1638 HK),GUOTAI JUNAN I (1788 HK),BINHAI INVESTMENT (2886 HK),GFI MSCI A I (3156 HK),CAM SCSMALLCAP (3157 HK),ZHENRO PPT (6158 HK),MR CSI3 ETF-R (CNY) (83127 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. 218 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 7 of 7